Is Fundamental Analysis important in Forex?
The Forex industry is dominated by Technical Analysis.
There are thousands of Technical systems and strategies available on the internet.
However, the majority of retails traders are still unprofitable!
Now, there are a couple of reasons why retail traders never reach success. And we’ll discuss them in a bit more detail in this article.
BUT, the number one reason why they struggle is the lack of Fundamental Analysis.
Many retail trader think the Fundamentals are not important. Most of them don’t even know what it is.
Did you know the VAST MAJORITY of institutional traders PREDOMINANTLY use Fundamental Analysis.
Let that sink in for a moment…
If the Fundamentals were redundant, why are the best traders in the world using it?
Now, we’re not trying to convince everybody to throw their Technicals out of the window.
Rather, think of this article as an introduction to the reasons WHY WE think the Fundamentals are important.
Below are some of the points we’ll discuss:
- Most Retail Traders never become profitable
- Following the leader is important
- Why does Fundamental Analysis make such a big difference?
- What advantages will the Fundamentals give me?
- Long-Term and Short-Term Fundamentals
- The place for Technical Analysis
- Technical Skills versus Technical Systems
- Reasons why Technical Systems don’t work
- Emotions also play a big role though
- Are they committed enough?
- Gambling or Trading?
Most Retail Traders never become profitable
There is a scary rumor going around in the FX industry.
Rumor has it that only 5% of traders are consistently profitable.
That’s a scary low number even if it’s just a rumor.
From our experience that number is a bit small, but close to accurate.
I’m sorry if that wasn’t what you wanted to hear. But, it’s true for most traders before they came to us so pay attention.
So, why are there so many retail traders that never become profitable?
There is a plethora of reasons why majority of retail traders never become profitable.
However, the most important one of these is the methodology they use.
Following the leader is important
Most retail traders envy the trading success enjoyed by Institutional traders.
Many traders would love to be able to trade like the institutional professionals.
BUT, what are the Institutional traders doing differently?
Most retail traders are looking for that holy grail indicator or trading system.
Most institutional traders are focused on Macroeconomics.
If the industry pro’s are using Fundamentals why should retail traders be different?
We’re NOT saying that Technical skills are useless. Many Pro traders use it on a daily basis.
BUT it’s the smallest part of their strategy!
The biggest skills to focus on should be Fundamental Analysis.
However, most retail traders don’t want to take the time to learn those skills. They would much rather buy a new robot or trading system…
Why does Fundamental Analysis make such a big difference?
The Fundamentals explains WHY the market is moving.
The Technicals only explain HOW the market is moving. There is a big difference here.
Knowing WHY a pair is moving help us to determine HOW best to trade it.
So, the Fundamentals comes before we even have a look at the charts.
It allows us to evaluate the mood of the market. This is based on many different things…
Yes, these are some of the things that can affect the direction of a specific currency.
BUT, don’t worry! It’s not as hard or complicated as it might look!
It’s like riding a bike or any other skill. It will get easier the more time you take to practice.
Rather rely on economics to pick your trade direction than blindly following indicators.
You won’t find many institutional traders relying on technical systems to tell them where to trade.
They anticipate currency moves based on their Fundamental and Sentimental biases.
Only after a bias has been established are Technical skills incorporated.
Unfortunately, for a lot of retail traders, the thought of having to learn Fundamental Analysis skills are just too much.
Did you know that trading firms pay up to $24,000 per year for a single Bloomberg Terminal?
Why spend that much money on the Fundamentals if it’s not worth it?
What advantage will Fundamental Analysis give me?
This is where we think a lot of traders are missing the bigger picture.
Firstly, there is nothing wrong with great Technical Skills. However, trading is a probability game.
There is a way of increasing the effectiveness of even the simplest Technical trading approach.
That is, by being able to choose only the highest probability trade directions.
This is done based on Market Sentiment and Fundamental Analysis. It’s that simple…
It is like driving a car. Even with the best driving skills you still need to look out your windscreen.
Trading without the Fundamentals is like driving with your eyes closed.
It gives us a way of seeing the market more clearly.
Knowing when to stay out of the market due to the Fundamentals is more important than any signal from an indicator.
Long term and Short term Fundamentals
It seems like a lot of traders think the Fundamentals can only be used for long-term trades.
Some Technical ‘experts‘ actually use that as a reason not to use Fundamental Analysis.
However, this could not be further from the truth!
The Fundamentals plays a very important role in the short, medium and long term.
The overall Fundamental Analysis of a currency can be used in all time-frames.
It all comes down to interest rates and what the current interest rate expectations are.
Using this can provide excellent short, medium and long-term trade ideas.
This is called Market Sentiment. So what exactly is market sentiment in trading?
Market Sentiment refers to the short to medium term mood of the market.
The short to medium term sentiment is how the market is FEELING towards a certain currency.
Sometimes sentiment can cause a currency to move opposite of its longer-term bias.
Let us look at an example below…
Above we can see how Sentiment causes moves against the longer term Fundamental bias.
We need knowledge of both the short and medium term Fundamental.
It would be difficult to determine the highest probability trade directions without it.
The place for Technical Analysis?
So where exactly does Technical Analysis fit into the picture?
Fundamental Analysis is what we use to choose the highest probability trade direction.
Then we use Technical skills to determine the best possible entry and exit levels. It’s that simple.
Without the Technicals you won’t be able to enter and trades properly.
Thus, they help to take trades after we know which direction which should be trading.
The below image gives a great process flow for how this should work.
So, both methodologies are important for consistent trading success.
The Fundamentals comes first to show us the best currency pairs to trade.
After this, even simple Technical methods will be more consistent.
Technical Skills versus Technical Systems
Now before we continue, let’s just make something very clear.
We are not against Technical Analysis! We use it on a daily basis in our trading!
Technical Analysis skills should be an essential element of your trading Methodology.
BUT, there is a MASSIVE difference between Technical skills and Technical systems.
Most retail traders fall into the trap of blindly following mechanical technical trading systems.
Traders like mechanical systems because they are usually simple to follow and implement.
However, trading skills takes time and experience.
Many traders aren’t willing to put in the time and effort to build the skills they need.
They would much rather rely on indicators to tell them what to do.
They would much rather let something else do the thinking for them…
These traders want to trade by systematically ticking boxes and following strict mechanical rules.
People like this as they feel a sense of safety by surrounding themselves with fancy indicators rules.
BUT, they forget one very important thing. The market is dynamic in nature.
And the market doesn’t play by those rules or follow those indicators.
Reasons why Technical Systems don’t work
There are a couple of reasons actually.
The first one is quite simple. Technical systems do not work consistently because the market is DYNAMIC.
The meaning of the word DYNAMIC is very important…
Dynamic : “characterized by constant change, activity, or progress.” (thanks Google)
The market is always changing.
The reason for this is because the market is driven by people. People are emotional.
They feel, and then they do.
The market might FEEL greedy and decide to trade accordingly. Or, it might FEEL afraid and trade accordingly.
There’s too many variables in trading that mechanical systems can’t account for.
A trader who uses their skills to trade can pick up on the subtle changes in sentiment.
Technical based system will always struggle in a market driven by emotions.
It might have periods of success, but no consistent profitability in the long run.
The market is not rational. It doesn’t move rationally.
Technical SKILLS, on the other hand, is incredibly valuable because skills are dynamic.
Let’s use a carpenter as an example. Skilled carpenters can adapt based on different wood types and shapes.
His skills allow him to be dynamic in his approach…
Emotions also play a big role though
Apart from the methodology there are other factors that cause traders to fail.
Emotions is definitely one of the biggest culprits!
Our emotions can affect our trading in more ways than people realize.
Emotions have the ability to turn the best traders into gamblers.
It’s not that emotions in itself is bad for trading. Rather, it’s uncontrolled emotions that can be dangerous.
Uncontrolled emotions will cause traders to abandon their process. It often leads to unnecessary mistakes.
A trader who does not have control over their emotions is like a ticking time bomb.
Traders are exposed to a unique type of stress.
Financial risk-taking ignites a different kind of stress. One that only high-performance athletes will understand.
Performance pressure is something that not everybody can deal with.
Consequently, emotions are one of the biggest reasons why retail traders never reach success.
Another reason why most retail traders struggle is a lack of commitment.
Forex Trading is hard work. It takes time to trade successfully.
Most newbies don’t realize how difficult trading can be.
Often times people give up on their trading dreams for this reason.
Trading is a professional career just like any other. It’s one of the most challenging endeavors I’ve ever tried to do.
Being able to trade successfully will take a lot of commitment. There are no shortcuts!
Many traders fall into the trap of thinking that trading is easy.
They soon realize that this is not the case! After numerous failures, the average retail trader simply gives up.
A lot of this is to blame on false advertising.
The scammers and frauds out there convince people that trading is a get rich quick scam.
When beginner traders realize that this was a lie, they normally give up on trading entirely.
The skills required to make it as a consistently profitable trader cannot be learnt overnight.
Unfortunately there’s no pills you can take which will give you commitment, You either have it or you don’t.
Oh boy this is a big one!
Lots of traders could turn their trading around overnight with better risk management.
Proper risk management is a critical success factor in trading.
It doesn’t matter how good you are or how well you choose your trades.
If you don’t have good risk management you will eventually bust your account wide open.
Every trader will experience losing streaks at some point.
Losing streaks are periods where traders experience successive losing trades in a row.
Statistically this cannot be avoided. So, what do you do when this happens?
Well, if you follow good risk management you won’t have to do anything.
Good risk management is not something you turn on and off when you like. It’s a habitual process that needs to be followed.
It can mean the difference between success and failure.
Don’t risk too much per trade! Never over-leverage your account! Let winning trades run! Don’t let losing trades run!
So, is Fundamental Analysis important in Forex?
We trust after reading this article you’re answer will be YES.
There is much more to trading than staring at price charts all day. Incorporating Fundamental Analysis will change your trading forever.
Any good strategy must contain both the Fundamentals and the Technicals.
It might seem like a lot of work at first. But it will absolutely be worth the time and effort.
For many traders the Fundamentals is the last piece to the puzzle. That Technical strategy you love might be able to work much better.
We hope this article has been helpful and insightful.
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